Volcano Corp. Seen Luring Deal on Activist Push: Real M&A

Nov. 13 (Bloomberg) -- Volcano Corp., a maker of diagnostic
equipment to test for clogged arteries, may lure suitors from
Abbott Laboratories to Medtronic Inc. as an activist investor
tries to dress it up for a sale.

Engaged Capital LLC, led by former Relational Investors LLC
partner Glenn Welling, disclosed a stake in Volcano last week
that made it one of the company’s 10 biggest shareholders. The
firm said it’s talking with management about ways to boost the
shares of the $1.1 billion company, which it sees as an eventual
target for larger medical device makers. JMP Group Inc. said
Abbott and Medtronic could be suitors.

Studies indicating cardiac stents are overused have
curtailed their use, pressuring sales of Volcano’s devices that
help place them. Buyers still may covet the company’s technology
that assesses when stents are necessary and limits costs and
side effects, said Jefferies Group LLC. While Engaged Capital
said Volcano should wait to sell at a higher valuation, Eagle
Asset Management Inc. said buyers may capitalize on its cheap
stock. Volcano has a lower sales multiple than two-thirds of its
North American peers, according to data compiled by Bloomberg.

Engaged Capital’s involvement underscores “the long-term
opportunities and how Volcano could be a nice acquisition
target,” Raj Denhoy, a New York-based analyst at Jefferies,
said in a phone interview. “If you look at where health care is
headed, in the United States and really around the world in
terms of trying to improve outcomes and reducing the cost of
therapy, this is right in that sweet spot.”

Attractive Target

In its Nov. 4 filing disclosing a 5.1 percent stake in
Volcano, Engaged Capital advocated for changes including
repurchasing stock and tying management compensation more
closely to increased shareholder value. Taking those steps and
investing in existing products would boost the shares and may
draw the attention of potential bidders, Welling, Engaged
Capital’s founder, said in a phone interview last week.

“Volcano is a very attractive acquisition candidate for
the large medical device players within the cardiac space,”
Welling said. “We don’t believe they should sell themselves
today. Once the stock is more fairly valued, and once they’ve
achieved some of the targets,” it should pursue a sale.

Anton Nicholas, a spokesman for Engaged Capital who works
at Integrated Corporate Relations Inc., declined to comment
further. Engaged Capital, which was started in 2012, has also
sought changes at drone-maker AeroVironment Inc.

Representatives for San Diego-based Volcano didn’t respond
to phone messages seeking comment on whether the company would
consider a sale or had received interest from suitors.

Eyeing Arteries

Volcano has two primary technologies. One is intravascular
ultrasound, which can be used by doctors to get images of the
inside of blood vessels and ensure that cardiac stents -- metal-mesh tubes that are threaded through the body to prop open
clogged arteries -- are placed correctly. The other, fractional
flow reserve, determines the severity of blockages and can help
physicians determine when using a stent is appropriate.

With Volcano missing analysts’ sales estimates in four of
the last five quarters, the shares have dropped 25 percent in
the last 12 months, even as the Russell 2000 Health Care Index
surged 47 percent.

Today, Volcano shares rose 4.4 percent to $21.19.

Results have been crimped in part because doctors are
performing fewer procedures using stents amid increased scrutiny
of their necessity, said Chris Pasquale, a Philadelphia-based
analyst at JPMorgan Chase & Co. That’s reduced demand for some
of the company’s technology, Pasquale said.

Good Prospects

While Volcano is projected by analysts to post its slowest
revenue growth this year since it became publicly traded in
2006, the growth potential for its devices that can help doctors
use stents more appropriately could attract acquirers, said
Denhoy of Jefferies.

The technology “improves clinical outcomes and it reduces
costs,” Denhoy said. While Volcano’s growth “might be somewhat
challenging over the near term, there still are very good long-term prospects.”

Medicare and Medicaid don’t currently provide standalone
reimbursement for Volcano’s devices, though they do offer
payments for placing stents, said Charley Jones of Barrington
Research Associates Inc. in Chicago. That has doused some of the
incentive to use Volcano’s technology, he said. Ideally, that
will change as the government realizes the benefits and tries to
lessen its health-care spending burden, said Jones, who sees an
eventual change in policy having an “exponential effect on
growth.”

New Products

New products -- including technology that can quickly
assess coronary lesions, such as those in patients dealing with
the deadliest form of heart attack -- will help to boost sales
in the next few years, Jones said. Volcano now markets the
technology in Japan and Europe and expects to sell it in the
U.S. by the second half of 2014.

Abbott and Medtronic could be interested in buying Volcano
to cut costs and boost revenue by marketing its products through
existing sales networks, said Jose Haresco, a San Francisco-based analyst at JMP.

Scott Stoffel of Abbott Park, Illinois-based Abbott, said
the company didn’t have a comment when asked whether it would be
interested in buying Volcano. Cindy Resman of Minneapolis-based
Medtronic didn’t respond to a phone message seeking comment.

While shareholders may complain about less than a 30
percent premium, or about $26 a share, buyers could see
Volcano’s low stock price as an opportunity to snap up the
company for a bargain, said Betsy Pecor, a fund manager at St.
Petersburg, Florida-based Eagle Asset Management, which oversees
about $30 billion, including shares of Volcano.

‘Right Opportunity’

Volcano trades at 2.8 times its $393 million in revenue the
last 12 months, a lower multiple than 65 percent of North
American cardiovascular device makers valued at more than $500
million, according to data compiled by Bloomberg.

Shareholders may want $35 or more a share in a sale, said
Jones of Barrington. Buyers may not be willing to offer that
much until Volcano proves it can boost growth, said Jones and
JMP’s Haresco. If Engaged Capital is successful at accelerating
growth, a deal may be more attractive for both management and
suitors, Haresco said.

“They have always been viewed as an attractive target for
a larger-cap company,” said Haresco in a phone interview.
“They have a good core business. The products aren’t
commoditized. That’s worth something to somebody.”